2024-11-04 12:02

Key takeaways In the general election on 27 October, Japan’s ruling coalition lost its lower house majority for the first time since 2009. As widely expected, the BoJ kept its policy rate unchanged. USD-JPY is likely to hinge on developments in the US over the near term, but will possibly fall later when the yield gap narrows. As we approach the end of the year, the JPY is still the worst performing currency in the G10 space, losing c7.2% against the USD year-to-date and c5.5% against the USD in October (Bloomberg, 31 October 2024). While the JPY’s underperformance in October was due to continued USD strength on the back of rising US yields and political uncertainty in the US, markets seemed to be concerned about Japan’s political uncertainty amid the lower house election result and potential implications for the Bank of Japan (BoJ). The 27 October snap general election concluded with the ruling coalition (i.e., the Liberal Democratic Party (LDP) and Komeito) securing 215 out of 465 seats, short of the 233 needed for a majority – marking the first defeat for the ruling coalition since 2009. Some of the smaller parties that the ruling coalition would likely work with – namely the Democratic Party for the People (28 seats) and Japan Innovation Party (38 seats) – have earlier spoken out against the BoJ’s recent rate hikes (Reuters, 28 October 2024). Parliament will have to vote on the Prime Minister by 26 November. Meanwhile, the BoJ kept its policy rate unchanged at 0.25% on 31 October, as widely expected. The BoJ noted that the Japanese economy was moving broadly in line with projections which are almost the same as those made in July (see the table below). The JPY was slightly stronger after Governor Kazuo Ueda mentioned that currency moves are having a big impact on the economy and price trends. Our economists still expect the BoJ to raise its policy rate to 0.50% in January 2025, and markets are now pricing in a c60% chance for such a hike. Source: Bloomberg, HSBC Source: Bloomberg, HSBC It is worth noting that the recent rise in USD-JPY has been much faster than the widening of the US-Japan yield differential (Chart 2). The last time a significant gap opened up was in 2Q24, which Japan’s Ministry of Finance (MoF) eventually took action to curb what it deemed as speculation and excessive JPY weakness. While such divergence is likely to be noticed by the MoF, moves in USD-JPY will hinge on US developments over the near term. Looking further out, we still think USD-JPY may fall later with the Federal Reserve (Fed) easing and the BoJ normalising. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-11-04/

2024-11-04 07:04

Key takeaways The stronger dollar and rising US Treasury yields have been driven by a string of better-than-expected US economic data. The Fed’s November meeting will take place after the US elections. While the election could bring with it some market volatility, the Fed is likely to look through this and focus on the recent data. Against a backdrop of decent Q3 earnings and resilient macro data, investors turned even more bullish on US stocks in October. Demand for volatility protection – as measured by the put-to-call ratio – is below average. Chart of the week – US dollar and EM assets The recent strengthening of the US dollar (USD) has put emerging market assets under pressure. Will it continue? The stronger dollar and rising US Treasury yields have been driven by a string of better-than-expected US economic data. The moves also reflect investor uncertainty about how the US policy agenda might impact fiscal deficits and inflation trends. New industrial policies, for example, could leave the Fed with less room to cut rates, boosting the USD further. However, the dollar outlook isn’t straightforward. The BRICS summit highlighted an ongoing trend for de-dollarisation; the reduced use of the USD in world trade and financial transactions. It’s notable that in emerging market FX reserves, the dollar is becoming less dominant. But this process is very gradual and seems likely to take decades. Back to today, the central scenario is one of ongoing disinflation, Fed cuts, and softer US growth. And these forces are consistent with lower US bond yields and a weaker USD. Market Spotlight Capital markets outlook Three things about the capital markets stand out. First, a medium-term economic regime of more volatile inflation and a new fiscal/monetary policy mix raises the assumption for interest rates. And that reinforces the appeal of core fixed income and the ‘all-in’ yields from ‘senior’ credit asset classes like infrastructure debt, asset-backed securities, and global investment grade. Second, the most compelling valuation anomaly today is in emerging markets. EM fixed income and equity returns look higher than in most of the G7. Opportunities in India, North Asia, and frontier markets stand out, as do themes in local currency EM bonds. Third, as the economic environment becomes more uncertain, there needs to be a larger role for private markets and other alternatives. That means focusing on diversifiers like hedge funds or commodities, the double-digit yields in private credit and infrastructure equity, and the emerging value in real estate and private equity. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Diversification does not ensure a profit or protect against loss. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 04 November 2024. Lens on… Fed takes it slow The Fed’s November meeting will take place after the US elections. While the election could bring with it some market volatility, the Fed is likely to look through this and focus on the recent data. On that front, it is in a more comfortable position than in September, when it opted to cut rates by 0.5%. On average, activity data have surprised to the upside, after a run of softer readings over the summer. Labour data have been mixed – employment measures have remained robust, despite depressed new hiring and layoffs picking up in September. Overall, the Fed is likely to be relaxed about growth and labour developments. And while core PCE inflation picked up on a month-on-month basis in September, the six-month annualised pace of change – something Powell has mentioned the Fed looks at – is running only marginally above target, at 2.3%. We see a 0.25% cut being delivered this month, which is in line with market pricing. To maximise the chances of a soft landing, the Fed is expected to opt for a further steady stream of cuts at subsequent meetings to bring the funds rate down to a more ‘neutral’ level by mid-2025. US stocks as a haven Against a backdrop of decent Q3 earnings and resilient macro data, investors turned even more bullish on US stocks in October. Demand for volatility protection – as measured by the put-to-call ratio – is below average. ‘Bulls’ still outweigh ‘bears’ in the AAII investor sentiment survey, and defensive sectors like Staples have lagged. Faced with uncertainty over potential economic policy changes in the months ahead, investors have so far opted for the perceived safety of US stocks. Emerging market equities have been weaker, notably in India, ASEAN, and China. Eurozone stocks have also been out of favour. Amid some reasonable Q3 earnings reports from Magnificent 7 stocks last week, US technology remains in demand – despite average price-to-book valuations at an all-time high of 23x and high overseas exposure, with 60% of sector sales going abroad. But Financials and even US small-caps have outperformed versus the rest of the world. Yet, US stocks could be vulnerable to a shift in mood once the details of any changes to US trade policies are clearer. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 04 November 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 04 November 2024. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Risk markets are on the defensive ahead of the US presidential election, with the US DXY dollar index consolidating after recent gains. Core government bonds weakened on upward US and Eurozone data surprises. Gilts lagged US Treasuries as investors fretted about the medium-term outlook for government borrowing, led by a rise in 2-year yields. In the US, the Nasdaq fell on disappointing outlooks from some tech heavyweights. Weaker tech stocks pressured the Euro Stoxx index. The Nikkei 225 pared most of its gains amid a firmer yen following hawkish comments from BoJ Governor Ueda. In EM, the Shanghai Composite Index and Hang Seng slipped ahead of the key National People’s Congress Standing Committee meeting. India’s Sensex index traded sideways. In commodities, easing geopolitical tensions pushed down oil prices. Gold prices reached a new high. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-11-04/

2024-11-01 07:05

Key takeaways US equities continue to surprise on the upside despite election uncertainty, supported by solid economic and earnings growth data, Fed rate cuts, and long-term structural trends. These factors should bode well for IT, communications, industrials, financials and healthcare, although some may benefit more or less from the election outcome. We prefer investment grade with 5-7 year maturities, where yield levels remain attractive. We prefer UK over Eurozone stocks due to the UK’s more favourable macro outlook, a lack of trade deficit with the US and heightened geopolitical risks. Moreover, UK equities tend to be more defensive in nature and remain cheap, supporting our overweight stance, but we also see opportunities in European IT, energy and healthcare. While we are waiting for more clarity around the size and the specific details of China’s fiscal stimulus measures, the potential for increased US tariffs adds to the complexity, so we remain neutral on mainland Chinese and Hong Kong stocks. Yet, valuations remain cheap. Within the region, we are more bullish in Japan, India, South Korea and Singapore due to their favourable market conditions and positive growth drivers. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/2024-11/

2024-10-28 12:02

Key takeaways The BoC cut rates by 50bp in October, with 125bp of easing delivered year-to-date, getting ahead of other G10 peers. Beyond the knee-jerk reaction, USD-CAD could drift higher in the run-up to the 5 November US elections… …but this momentum may not extend into 2025 when other factors supersede political forces as the key FX drivers. On 23 October, the Bank of Canada (BoC) quickened its easing pace by cutting its policy rate by 50bp to 3.75%. This was the fourth consecutive cut this year. With 125bp of easing delivered year-to-date, the BoC has become the most dovish G10 central bank. The BoC has now turned cautious of inflation undershooting the 2% target, with core inflation below 2.5% and headline inflation of 1.6% in September (Chart 1). Meanwhile, business sentiment remains weak and GDP on a per capita basis continues to decline. Our economists expect another 50bp cut in December, followed by 75bp of easing in 1H25. With the 50bp move fully priced in by markets, the knee-jerk pop higher in USD-CAD did not last. Looking beyond the BoC’s announcement, we expect moves in USDCAD to be driven mostly by USD sentiment over the near term. With the recent derisking ahead of the 5 November US elections, USD-CAD could drift higher. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Nevertheless, once the election result is known, the next response in the FX market, may persist for days, weeks or months. A Republican presidency could see the USD strengthening, which could weigh on the CAD, while a Democrat presidency could see USD-CAD reversing lower. But this post-result reaction may not set the tone into 2025 especially when other factors supersede political forces as the key FX drivers. USD-CAD has been closely following its yield differential (Chart 2), and this will probably continue to be the case in 2025. In general, oil prices tend to influence the CAD only when interest rate markets are quiet. But this may not be the case, as the easing cycles continue, with the possibility of market recalibration. The other remaining driver to the CAD tends to be risk appetite. But unless there is a US recession (and associated risk aversion) or a global ‘Goldilocks’ story, i.e., the global economy shows signs of resilient growth with slowing inflation, (and associated risk appetite), there is little reason to assume that USD-CAD is about to get exciting. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-10-28/

2024-10-28 07:04

Key takeaways Nearly one-third of S&P 500 firms have reported results for Q3, with the analyst consensus looking for year-on-year earnings growth of 3.5% overall. So far, progress looks good. Sovereign bond investors are in a jittery mood ahead of the UK Chancellor’s inaugural Budget on 30 October. EM expected returns look good. The risk premia for asset classes like stocks, EM local-currency bonds, and Asia high-yield bonds are elevated because policy rates are expected to be a bit higher over the next decade. Chart of the week – EM versus DM growth gap widening Last week’s jamboree of finance chiefs and policymakers at the annual meetings of the IMF and World Bank in Washington confirmed what many investors already know; inflation is in retreat and global growth remains impressively resilient. The soft landing is here. For the US, UK, Japan, Southern Europe, and some Emerging Markets (EM), the IMF has upgraded its 2024 scenario. It’s a triumph for central bankers. But the challenge for investors, of course, is assessing how much of this good news on the economy is already priced in. Heading into 2025, global growth is forecast to continue at 3.2%, adjusted for inflation. US growth is expected to be more normal, at just over 2%. Europe is projected to pick up, with the cost of living shock fading, to 1.2% in the eurozone and 1.5% in the UK. And EM economies are expected to grow at 4.2% on average – with country differences. Asia looks best placed in EM, with 2025 GDP at 5%. India is still expected to be the fastest growing major economy in the world (IMF forecasts 6.5% GDP in 2025). And frontier economies are also projected to grow strongly next year. Faced with this macro scenario of the major economies drawing closer together in their growth rates, investors might well ask whether the era of “US exceptionalism” is coming to an end? Can Europe, Australasia, and the Far East (EAFE) and EMs go from being market laggards to leaders, and outperform the US? Market Spotlight X-factor strategies We’ve seen a rotation in global stock markets this year, and the new analysis of September’s performance sheds light on where that’s been happening. Quant multi-factor strategies work by weighting to ‘factors’ like Quality, Value, Momentum, Size (smaller-cap) and Low Risk. So, their performance explains a lot about changing trends in market sentiment. This year, with so many previous winners (especially in the tech sector) still outpacing the market, Momentum has been strong. But with the Fed cutting rates in September, we saw a shake-up of factor returns during the month. The defensive Quality factor performed best, setting the pace in North America, Asia Pacific ex-Japan, and emerging markets. The market leadership is broadening out across sectors as global policy easing continues and central bankers seek to make the soft landing stick. And with the cyclical Size factor also relatively strong in North America, Europe, and EMs in September, it showed that smaller-caps are very much part of that rotation mix, too. Value ranked in the middle of factor returns globally, but it did perform well in Europe – hinting that investors are feeling more confident about looking beyond US markets for opportunities. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 25 October 2024. Lens on… Upbeat earnings Nearly one-third of S&P 500 firms have reported results for Q3, with the analyst consensus looking for year-on-year earnings growth of 3.5% overall. So far, progress looks good. Three of the top five earnings growth contributors in Q3 are expected to be Tech firms, with the other two in Healthcare. Based on results versus expectations, Tech, Real Estate, Financials, Staples, and Healthcare have all come in better than average. But Energy and Materials have been at the lower end. Tech companies are expected to dominate the earnings pie for several quarters to come, but a lot rests on high expectations. The S&P Tech sector currently trades on a trailing price-book value of 12.3x. That’s higher than before the sharp sector sell-off in 2021 (see chart) and surpasses its previous all-time high of 12.1x in 2000. As a comparison, Tech stocks are up by nearly 600% over the past decade, while Real Estate and Consumer Staples are up by only 40% and 60% respectively. With continuing signs of a rotation in sectors and styles, stretched Tech sector valuations demand caution. Deficits forever? Sovereign bond investors are in a jittery mood ahead of the UK Chancellor’s inaugural Budget on 30 October. Like many developed and EM economies, the UK’s parlous fiscal position is a major challenge. The fiscal deficit is at levels usually associated with wartime, while the net debt/GDP ratio has risen to just shy of 100% in 2023, with the IMF expecting that to worsen. Higher GDP growth would be the optimal way to fix it, but UK productivity has flatlined since the global financial crisis. Investment as a percentage of GDP has consistently lagged the US and eurozone since the early 1990s. Major political and economic obstacles make austerity-like policies unworkable. Governments are compelled to pursue active fiscal policies to address inequality, low productivity, and population ageing. The multi-polar world and climate change also require extra spending on defence and the transition to net zero. The upshot is big deficits could be with us for a while. Despite UK inflation trending lower, gilt yields have remained stubbornly high – a signal that investors are uneasy. EM opportunity EM’s expected returns look good. The risk premia for asset classes like stocks, EM local-currency bonds, and Asia high-yield bonds are elevated because policy rates are expected to be a bit higher over the next decade. Good starting valuations mean that, over the long run, investors should be able to harvest income, or achieve capital gains. In addition, EM currencies could boost potential returns further. The FX valuation model tracks the misalignment of current spot rates versus a fundamental valuation anchor. And it incorporates how macro fundamentals will evolve over the next decade to move FX equilibrium. Geopolitical risks and a new multi-polar world mark a profound shift in the economic regime. But EM investors could benefit as macro trends in Asia and the Global South diverge from the West. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream, Data as at 7.30am UK time 25 October 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 25 October 2024. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Global markets struck a cautious tone last week ahead of the looming US presidential election on 5 November, and key US payrolls data this week. 10-year US Treasury yields reached a three-month high of 4.26% before easing later last week, with the US dollar also rallying to a three-month high mid-week on uncertainty over the timetable for Fed rate cuts. In US stocks, both the large-cap S&P 500 and small-cap Russell 2000 declined early last week despite generally positive Q3 earnings news. The pan-European Stoxx Europe 600 fell, with Japan’s Nikkei 225 also seeing declines on political uncertainty ahead of the general election on 27 October. In emerging markets, China’s Shanghai Composite was a rare positive performer, but India’s Sensex and Korea’s Kospi indices both lost ground. In commodities, the oil price was broadly stable, and gold traded just short of record highs. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-10-28/

2024-10-24 08:06

Key takeaways Geopolitical risks and US election uncertainties buoy gold… …but this is not supported by physical demand… Firm USD and US yields could tame fresh gold rallies. Recently, uncertainties around the US elections on 5 November and geopolitical concerns have been supporting gold. The near-term upward trajectory shows no signs of easing. Gold prices could go even higher over the near term and into 2025, but the rally may become overstretched and possibly be curbed when the USD and the US yields stay firm, in our precious metals analyst’s view. Our precious metals analyst believes gold has entered a new price paradigm, which will probably remain above USD2,200 per ounce, supported by a mix of bullish factors, including “safe haven” demand prompted by geopolitical risks and economic uncertainty. Mounting fiscal deficits are also encouraging gold demand. Global monetary easing and expectations of further easing have increased speculative demand for gold. Nevertheless, a combination of physical and financial market factors may tame the rally, as we move through 2025, with gold prices likely to be moderately lower by end-2025. In the physical market, high gold prices are driving outright declines in gold jewellery purchases, alongside lower gold coins and bar demand. At the same time, global gold output is on an upward trajectory at least for this and next year, with mining being the biggest single source of new supply to the market. High gold prices are also stimulating scrap supply of gold. In other words, gold may face headwinds from weaker demand for jewellery and bar & coins and rising mine supply and recycling levels. Gold exchange-traded funds (ETFs) continue to liquidate holdings, and central bank demand may also moderate in the face of high prices. Source: Bloomberg, HSBC Source: Bloomberg, HSBC It is also worth noting that gold is an asset without a yield and is priced in USD, so gold prices generally move inversely to the USD, albeit not in lockstep. In our view, the USD is likely to stay firm into 2025, supported by relative high yields (as other central banks are likely to ease if the Federal Reserve cut rates further) and its “safe haven” status (amid geopolitical risks and global growth uncertainties). As the global monetary easing cycle continues, further rate cuts may be progressively less supportive of gold prices, especially when the inverse relationship between the USD or US yields (Chart 1 and Chart 2) and gold may be restored. All things considered, our precious metals analyst thinks that gold will probably have a volatile 2025, with a much wider trading range (relative to its 10-year average annual range of USD300 per ounce), before moving moderately lower into end-2025. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/flash-2024-10-24/